The FSA has just published a new set of principles: on remuneration.
Much here isn’t really new. And its hard to tell what the impact of these kind of regulations-that-dare-not-speak-their-name are when things are kept so deliberately oblique. Still, though, there’s content here, to be sure:
4. Assessments of financial performance to calculate bonus pools should be principally based on profits. The bonus pool calculation should include an adjustment for current and future risk, and take into account the cost of capital employed and liquidity required.
This is a bit of a funny statement. That bonus pools should be “principally based on profits” is nothing groundbreaking really, and pretty much the status quo. Quite how that squares with the next bit – that calculations should also take into account “capital employed and liquidity required” is edging more into the unknown. It sounds curiously like some kind of VaR-based assessment.
There’s also a compliance-based element:
6. Non-financial performance metrics, including adherence to effective risk management and compliance with regulations, should form a significant part of the performance assessment process.
Again though, this seems like a bit of a reformulation of the hitherto unenforced status quo. Under what circumstances previously did the FSA consider it acceptable for bonuses to be paid for breaking compliance and regulations?
It seems that what the FSA wants is for bonuses to be set at institutions by some kind of global HR-function linked to the compliance and risk management departments, not by individual cost centres or trading groups.
To wit:
3. Compensation for staff in the risk and compliance functions should be determined independently of the business areas. They should have different performance metrics, with greater emphasis on the achievement of their own objectives.
Sounds rather innocuous, but it’s a sea-change. And one that will cause a lot of consternation, particularly on trading desks.
We suspect banks will resist such “principles”. Instead, what they’re most likely to take away from all of this, as a sop, is this point:
9. The major part of any bonus which is a significant proportion of the fixed component should be deferred, with a minimum vesting period.
And with it:
10. It is highly desirable that the deferred element of variable compensation should be linked to the future performance of the division or business unit as a whole.
This is probably the easiest new bonus principle to try and put into effective action in the City.
But will it work?
After all, many existing bonuses were paid in stock. In many circumstances, the interests of employees were very much economically aligned to the interests of shareholders.
Bonuses encouraged greed which encouraged short-termism.
But guess what: greed also lies behind the passivity of shareholders, who for the past decade sat idly by and saw their shares and dividends rocket.
Blame cuts both ways. Unpalatable though many aspects of the City’s runaway bonus culture are, it’s also invidious to single out employees for blame while the owners of failed financial institutions are treated with kid-gloves.